FHFA issues final rule for Fannie Mae, Freddie Mac capital

The Federal Housing Finance Agency has finalized amendments to its enterprise regulatory capital framework, largely confirming proposed modifications that encourage the issuance of credit-risk transfers and make leverage ratios more dynamic.

Under the plan’s final rule, Fannie Mae and Freddie Mac, both of which the FHFA oversees, will no longer have a requirement to apply an overall effectiveness adjustment to retained CRT exposures. In addition, a prudential floor of 10% on the risk weight assigned to any retained CRT exposure will be reduced to 5%. Also, a fixed leverage buffer equal to 1.5% of total assets will be replaced with a dynamic leverage buffer. It will be equal to 50% of the separate stability capital buffer each of the entities has. The rule, which also contains some technical corrections, will become effective 60 days after it is published in the Federal Register.

Collectively, the finalized amendments aim to help Fannie Mae and Freddie Mac’s manage risk and rebuild capital while retaining enough flexibility to fulfill their affordable housing missions.

“The final rule provides the enterprises with the necessary incentive to transfer credit risk to private investors, which will help protect taxpayers from the risks posed by the enterprises and will support the enterprises as they strive to provide equitable and sustainable access to mortgage credit,” Sandra Thompson, acting director of the FHFA, said in a press release.

Under the Trump administration, former FHFA Director Mark Calabria set relatively higher capital requirements on CRTs he saw as more in line with their risk. That move in turn reduced the extent to which they were used.

CRT issuance also has been complicated recently by market disruption associated with Russia’s invasion of Ukraine, which prompted Fannie Mae to hold off on issuing a deal. Fannie refrained from issuing CRTs during the pandemic due to the Trump administration change in capital requirements, and only returned to the market late last year.

The two government-sponsored enterprises have purchased a significant portion of the home mortgages in the United States since being brought into conservatorship during the Great Recession’s housing crash, and the FHFA monitors their financials closely to ensure they remain a stable source of market liquidity.

The Trump administration had set capital requirements on the GSEs both to ensure their financial stability and to prepare them for a possible exit from conservatorship, but currently Fannie and Freddie are considered more likely to remain wards of the government, or recast as utilities.

The FHFA’s final rule for the capital plan came shortly after the release of the agency’s updated minimum eligibility requirements for the companies that sell and service loans sold to Fannie and Freddie, a related effort also aimed at mitigating risks to the GSEs’ financial soundness. Additionally, a recent draft FHFA strategic plan suggested the agency has been questioning whether all of Fannie and Freddie’s counterparties are tightly regulated enough as it revived a mention of concern about the agency’s lack of examination authority over nonbanks.

If a proposal issued by the FHFA late last year is finalized, Fannie and Freddie would submit annual reports for capital planning purposes.